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Thursday, June 20, 2013

Why easy, if you can do it the hard way?

Greece's creditors have debt maturities of 3,7 BEUR in 2013-14 and 1,9 BEUR in 2015-16 coming up. Under normal circumstances, one would expect the borrower to simply redeem the debt when it falls due. In practice, most borrowers never redeem their debt. Instead, they refinance it.

Anyone who thinks that Greece could really achieve a net reduction in debt should go back to Algebra 101. I mean, where should the money come from?

In a normal financial restructuring, creditors always keep shorter maturities on part of their debt. Why? Because every time a maturity comes up (and the borrower obviously can't repay), it gives creditors the chance to negotiate something. Either compliance with an agreement already in place or a new agreement.

Suppose a regular borrower had 5,6 BEUR maturities coming up in 2013-16 with 10 private banks. The borrower would simply invite the 10 banks to negotiate the terms for roll-over. The banks state their terms, the borrower checks acceptability, perhaps negotitates a bit, and off they all go. No big deal (unless there is a snag).

Of course, one of the banks could refuse to play ball and instist on actual redemption. Well, that poor bank will come under enormous pressure from all the other banks.

So why is it so difficult in the case of Greece? First of all, because those maturities are not bank loans. They are bonds and there is no way to simply roll-over bonds. The only way to achieve a roll-over with bonds is to issue new bonds in repayment of maturing bonds.

And here comes the catch. A good chunk of those bonds is held by the ECB. If the ECB accepted new bonds in repayment of maturing bonds, that would be considered as direct government financing and - ouuch, you guessed it: the ECB is not permitted to do direct government financing.

So, here we go. Something like a catch-22. We will see seemingly endless negotiations; a lot of back-and-forth; a lot of exchange of position papers; etc. At the end of the day, and I venture to say that this is certain, one will have agreement to roll-over the debt in whatever technical form permissable.

And if it were private bank loans instead of bonds from official bodies? Well, I guess one conference call among the 10 banks, if well prepared and if there is no snag from the borrower, would take care of this issue.